Criticisms of the potential expense and lack of value for customers have been made following the conclusion of the consultation period on creating a secondary market for annuities.
The Treasury’s consultation into suggestions made during the last government’s tenure finished today (18 June), with providers, consultants and industry bodies airing their views.
The National Association of Pension Funds expressed concern that the creation of a secondary market may be so expensive that it would greatly reduce the value available to most annuitants.
It also suggested that many sellers will need protection in the form of independent advice, which will come at a “significant cost” and reduce the value of the transaction to the seller.
Even if the infrastructure for a market were to be put in place, it is not clear who will be the buyers of the annuities, with a Napf member survey suggesting only 13 per cent of defined benefit respondents would be interested, compared with 67 per cent ‘not interested’.
Graham Vidler, Napf’s director of external affairs, commented that the government has a “knotty problem” to unpick if it wishes to create the full market it originally set out for savers and ensure it consistently provides value for money.
Earlier this year, providers started to split on whether they would want to get involved in a potential market, with LV and Legal and General sounding positive notes, while Aviva and Aegon looked to rule themselves out.
Aegon’s regulatory strategy director Steven Cameron stated that there are challenges for existing annuity holders, annuity providers, the third parties buying the annuity and financial advisers.
“The ability to sell on an annuity in exchange for cash or for transfer into flexi-access drawdown might seem like a logical extension of the recent pension freedoms, particularly for those who purchased their annuity before the freedoms were announced.
“However, the government must avoid sending out the message that this is right for most people,” he said, adding that one of the fundamental challenges facing policymakers is that it will be difficult for people to assess whether the lump sum they are being offered is a fair swap in return for the guaranteed lifelong regular income they are giving up.
Aegon’s consultation submission noted that professional advice could cover all the benefits and risks, including unexpected tax bills, running out of money, or losing ongoing payments to a spouse in the event of their death - an issue that could particularly affect women who typically have less private pension provision.
“There’s also a real risk of people cashing in an annuity, spending the money, having an income below the means tested benefit threshold but are only then told they’ve lost their entitlement to a government top-up.
“The government’s new state pension will be set above the means-tested threshold but not everyone retiring in future will have full entitlement and many existing annuitants have a much lower state pension, meaning this could be a huge issue.”
Consultancy Hymans Robertson responded by saying that a secondary market remains a good idea in theory, but significant hurdles could frustrate the running of a viable, large scale framework.
Douglas Anderson, partner at the firm, said that for a successful and safe market, five things will be required: “First, a standardised health underwriting process to give confidence to all buyers. Second, an open bidding process whereby all buyers can offer a price to sellers based on their assessment of the data provided.
“Third, a robust audit trail of the seller’s decision and reasons behind it; this suggests the potential for further advice behind the decision.
“Fourth, a major communication exercise by government, similar to the pension freedoms earlier this year. Finally, allowing existing annuity providers to voluntarily offer surrender terms to customers, which would likely improve pricing.”
Specialist retirement adviser Portal Financial also warned that while allowing annuity providers to bid in the market is arguably positive, as it provides further price options for the seller, it still does not address the fact that anyone selling an annuity is likely to get a raw deal.
“Providers being able to purchase back the annuity also raises new concerns; for example, it’s essential that the government mandates providers bid along with the rest of the market otherwise annuity holders may simply ask their provider for a price-adjusted refund and get a terrible offer.”
peter.walker@ft.com
